Dutch disease hypothesis, its impacts and policy responses
The two main effects of Dutch disease are (1) the spending effect and (2) the resource movement effect. The spending effect refers to increased government spending in the non-tradable sector, enabled by windfall revenues from the booming sector. The increase in government expenditures in the non-tradable sector stimulates demand in this sector, causing prices in the sector to rise relative to prices in the tradable sector.9 This causes real exchange rate appreciation. The resource movement effect occurs when increased profitability in the booming sector attracts resources (capital and labor), leading to an increase in the price of these factors. The associated decrease in factor intensity in the tradable sector causes a relative decline in this sector.